U.S. Growth Slows--and Foreign Economies Feel the Pain
If you want a vivid illustration of America's role in the global slowdown, consider that the U.S. buys up nearly one-fourth of the rest of the world's exports. And the growth rate of the volume of goods coming into the U.S. has swung from a 17% annual pace last autumn to a -5% pace currently. No wonder many economies abroad are struggling.
To an important extent, though, the rest of the world's pain is America's gain. True, the growing weakness in exports has been a considerable drag on the ailing manufacturing sector. But the dropoff in imports is acting like a shock absorber, because much of the fallout from weaker demand is being felt by foreign producers, not the U.S. economy. A decline in imports is improving the trade deficit, which has shrunk for two consecutive quarters. That has contributed a small plus for growth in real gross domestic product in both the first and second quarters.
In this particular slowdown, the stabilizing influence of falling imports is especially large. That's because the slump is concentrated in business-sector cuts in capital spending and inventories, mainly for tech-equipment. About 36% of U.S. dollar outlays for capital goods goes to imports. For tech gear alone, imports account for about 16%. That means foreign companies--and countries--are absorbing a large share of the burden of dealing with U.S. corporate cutbacks. One case in point: Singapore is in recession mostly because its shipments to the U.S. of semiconductors and other tech components have plunged dramatically.
FURTHER PROOF is in the latest trade data. For the second time this year, the monthly trade deficit shrank sharply and surprisingly, from $32 billion in April to $28.3 billion in May. Previously, the February gap had narrowed unexpectedly, suggesting the trend toward ever-wider deficits, in place from 1998 to 2000, has reversed course (chart).
In May, exports broke from their downward trend, posting a 0.9% rise, reflecting increases in oil-field machinery and aircraft. However, imports dropped 2.4% for the second month in a row, the largest two-month decline since the data have been compiled to include both goods and services. Imports of semiconductors and telecommunications equipment led the plunge, along with lower imports of consumer goods.
For the total capital-goods sector, the impact of U.S. imports, especially tech equipment, has been enormous. Since hitting a peak last September, price-adjusted imports of capital goods have fallen 20%, accounting for more than 80% of the overall decline in imports (chart). The dropoff picked up speed in April and May, as capital-goods imports plunged 9% and 5.6%, respectively, after declines averaging 1.3% from January to March.
Why the dramatic fall? What has gone largely unnoticed is that while U.S. companies were busy exporting the New Economy overseas, they had been importing high-tech gear at an even faster rate. Indeed, the U.S. trade balance for capital goods, excluding autos, has turned significantly. In 1997, the capital-goods balance was in surplus by almost $30 billion. By the end of last year, it was in deficit by more than $80 billion.
Imports will almost certainly decline further in coming months. Businesses are still adjusting their tech-related capital spending, and inventories of tech equipment remain high. To the extent that excess inventories of tech gear are imports, the burden of reducing the overhang will fall on foreign orders and production. However, as was evident in the second quarter, business-sector cutbacks in outlays for imported equipment will not count against GDP growth, since imports are subtracted from GDP.
The trade turnabout not only supports GDP growth. It also means that the burden of financing the U.S.'s external debt has stopped growing, at least for now. At a record 4.5% of GDP in 2000, however, those IOUs remain enormous, and they require the lion's share of world savings in order to finance them.
SO WHAT ABOUT THE OTHER SIDE of the trade ledger? Unfortunately, U.S. exports are also sagging badly. Despite the May gain, the volume of exported goods is down nearly 8% from its peak of last August. If exports had managed to stay at their August level, the May deficit would have been only $24 billion.
But there's little reason to expect a recovery any time soon. First of all, economies overseas will not pick up until after the U.S. does. In the second quarter, growth in the euro zone ground to a halt, with German GDP apparently having declined. Export weakness throughout Europe is depressing industrial output and employment, which will weigh on domestic demand in the second half. The Japanese economy seems certain to shrink at least through the third quarter. Growth in emerging Asian economies has slowed, although not alarmingly so, outside of Singapore. And Latin America is beset by Argentina's financial woes and their spillover to Brazil. Those problems will drag on in the second half.
SECOND, THE DOLLAR remains stronger than ever. Unlike in the past, when interest-rate cuts by the Federal Reserve weakened the dollar, this time around the dollar keeps rising. From the end of last year through mid-July, the trade-weighted greenback has risen 6.3%, and it is up 14.8% from the end of 1999, a pattern that has lifted the price of many U.S. goods in foreign markets. It has also cut deeply into the profits of U.S. multinational companies, as those earnings are repatriated back in the U.S.
Continued weakness in exports is one reason not to expect a continued narrowing in the U.S. trade deficit this year. Another is that firmer U.S. demand expected in the second half should lift imports once again. The latest piece of evidence on that is the Conference Board's composite index of 10 leading indicators, those that foreshadow or "lead" economic activity. It rose for the third consecutive month in June (chart). That hasn't happened since 1999, just before the index turned down, signaling the current slowdown.
A U.S. turnaround will probably cause imports to turn up before exports do. Consider that, excluding oil, the U.S. now spends 28 cents out of every dollar on imported goods, up from 19 cents a decade ago. However, imports will not come storming back. The reason comes back to tech, where the upturn will be slow to develop, given the glut of equipment and the steep reversal in demand.
The irony of the U.S.'s growing dependence on imports is that, at least for now, the nation is benefiting from the import-oriented shrinking in the trade gap, which is adding to overall growth. But by yearend, if the rest of the world doesn't increase its appetite for U.S exports, look for the trade gap to start yawning again.
By James C. Cooper & Kathleen Madigan